Does Source of Capital Affect Investment and Firm Value?

This paper investigates the effect of financing frictions due to source of capital, on firm investment and value. Using instrumental variables approach that controls for endogeneity arising from demand-side factors, we find that firms with access to public debt markets have 11% higher investment than firms without access. Using a structural approach, we find that firm value is 23% lower for firms without access. The estimated effect of financing frictions on firms is even bigger once the specification allows for firms to self-select the source of financing. Thus, source of capital has significant impact on firm investment and value.